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Pricing Emissions
China’s Carbon Markets Stumble

When China unveiled a pilot program for carbon trading in seven regional markets, greens were quick to seize on the experimental policy as proof that carbon markets could be easily installed globally, if only the political will existed. But Beijing’s experience is proving that assumption naive as it struggles to make the transition to a national carbon market. Reuters reports:

The national scheme should be ready by the end of next year or early 2017, but traders said the transition to a national system is already causing problems.

“The opaque policymaking process makes it confusing for trading companies, and without clarification on market integration, companies are not encouraged to make long-term trading plans,” said a senior trader who declined to be named.

Four of China’s seven pilot markets have reached the end of their compliance year, which should have boosted trade volumes as firms bought permits to cover annual targets, but activity has remained slow.

It isn’t just the volume of trading in these pilot markets that has planners concerned. Prices for carbon permits have plunged recently:

Prices in five of the markets have fallen sharply, with the Shanghai market ending its compliance year on Tuesday at 15.5 yuan, down 38 percent from its launch. Permits in the biggest pilot exchange in Guangdong have dropped 73 percent to 16 yuan.

As Europe knows well, pricing is critically important in any carbon market. Too high a price for carbon and you risk incentivizing energy-intensive industry to outsource production (a process known as carbon leakage), but too low a price and firms find little reason to adjust behavior and curb emissions (as we’ve seen in Europe).

Beijing has made a lot of headlines recently for its eco-friendly target setting, and central to many of these plans has been the implementation of regional carbon markets, and eventually the creation of a national system. So far things are not going exactly according to plan.

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